Volatile, disastrous, recession, meltdown, losses, crisis, recession — these are all words journalists and observers have used lately to describe the U.S. economy…and that also means Koolauloa and even other parts of the world, as the current economic downturn impacts all our lives in one way or another.

For example, some of our friends and neighbors have first-hand experience with recent job layoffs. Some have not been able to sell houses anywhere near their initial asking price. As the stock market plummeted approximately 40–50% in value, others lost thousands and thousands of dollars from retirement funds. Vacation travel is often an early victim, and Hawai'i hotel occupancy as well as visitor counts at places such as the Polynesian Cultural Center have been off by about 20%.

Large corporations and average Joes have all felt a strain hit the bottom line and family checkbooks, as prices have correspondingly gone up. The real estate market has been turned upside-down. Words such as skyrocket, bankruptcy, foreclosure and bailout come to mind, along with images of bursting bubbles. Thank heaven gasoline prices have recently declined, but is that situation temporary?

The stock market, which lately seems somewhat stable between 8,000–9,000 (DJI) as always is up and down, but emotional factors make each movement seem more portentous. Individuals with 401(k) and other retirement funds invested in stocks watch anxiously, hoping to regain some of their losses. These losses have also brought down large investing organizations, such as insurance companies, and a recent Honolulu Advertiser front-page headline indicated the Hawai'i State employees' retirement fund lost approximately $1 billion on paper.

So, what happened? And more importantly, rather than just talk doom and gloom, what can we do about it?

Eric Marler [pictured at right], Executive Vice President and Chief Financial Officer of Hawai'i Reserves, Inc. (HRI), who is also a CPA and former tax and financial advisor, explained recent economic events are similar to the savings-and-loan disaster in the early 1990s:

"Traditional lending standards that were established to protect the loan investments of banks and other lending agencies were significantly relaxed," he said, resulting in a "huge influx of capital into the real estate market. Also, borrowers…used their real estate for other kinds of purchases through home equity loans. That credit was flowing quite easily, and there was an easier lending environment for corporations. People who would not traditionally have been able to borrow money for [adjustable rate] mortgages [ARMS and balloon mortgages] qualified for them, which they could probably only afford for a couple of years."

He added that collateralized mortgage-backed securities also "enabled banks and other lending institutions to increase the amount of money flowing into the real estate market," which drove property values up in Hawai'i and all over the U.S. "This easy credit created a lending and speculative frenzy in our economy."

Marler explained the resulting loans were packaged and sold to a series of Wall Street intermediaries. "It's pretty standard to sell loans like this, although the volume had gone up dramatically over what had been done in the past. Our insurance companies and stock brokerage accounts were investing in these…not only in the U.S., but all around the world."

"Then the inevitable happened: People who couldn't afford them in the first place, had those loans adjust on them, and they couldn't afford to pay them back. The securities in which these loans were wrapped, then began to sour and go bad, which meant the financial strength of the institutions investing in those securities began to teeter. That's why we saw some of the big insurance companies like AIG [although AIG Hawai'i officials said they're not affected], for example, sail into very difficult waters."

Suddenly, homes were no longer worth the value of their equity loans, and in such dire circumstances, Marler said healthy financial institutions swung the pendulum in the other direction toward "hard credit, almost no credit, making it difficult for even credit-worthy customers to get loans."

He said, "Even though the U.S. taxpayer has pumped $700 billion-plus into the Treasury, and therefore into the banking system," the banks will still run the establishment the way they think it should be run.

Locally, he added, the lack of home equity loans might have dried up finances for college and other major objectives. "That means real and difficult choices right now": Does mom or dad get another job? Does a child drop out of school? "What are the items that I can pull back on, and not really affect my lifestyle that much? Things like a new car, a vacation."

"When people are afraid, there's an emotional outfall that directly relates to how we spend money. The PCC parking lot evidences the kind of fear that has rippled through the economy; and fear once entrenched, and confidence once lost, is very difficult to reverse. That's why I think it's going to take more than a year in order for people to regain enough confidence to begin spending money again."

Marler and others made several observations and suggestions to help reach that point:

• "It really depends where you are in life, but my advice is if you can afford to stay in the stock market, leave the money in. You're better off to ride through the storm than to sell and get out."

• Or as another advisor remarked, to sell now guarantees a big loss, whereas to buy now means investors are getting in at lower prices.

• "There is a future out there," Marler continued, "and you have to ask yourself: Do I believe that future involves a solvent, productive United States of America? The answer is, yes, I still fundamentally believe that…and the investment environment will continue. Investing is still smart."

• "How should I change my investment strategy?" he asked. Marler, who said he doesn't have time to watch the market, recommends using professionally managed mixed funds, "depending how far you are from retirement." For example, he said the DMBA guidelines for people employed by the Latter-day Saint organizations in Laie, are good.

• Baby-boomers might have to push off retirement for a while until "their stock investments recover. This may slow down the run for retirement everybody thought would happen," Marler said. "Actually, this probably makes corporate America happy, because they were facing a shortage of skilled talent that they now might be able to retain a little bit longer."

• He advised young couples to "pay off student loans first, then acquire a home, and with each paycheck regularly save a certain amount of money for the future. If you believe America has a future, saving will always be a smart thing to do."

• "I put my money where my mouth is," Marler added. "I put as much as I can into my 401(k), because now is the time to buy."

• "Don't panic. Fear often causes us to make decisions that we wouldn't otherwise make."

• "Be cautious and slow down spending wherever you can, but don't darken your attitude about the future. Depression can be created through fear."

Marler advised business owners to try to stay afloat: "When your income shrinks, your expenses have to shrink with it. That's what we see happening around us." He added, however, the impact on various business sectors varies. For example, while tourism is off, people still have to eat, so grocery stores are still doing well.

For individuals, he said: "Do the same things you do in good times: You should be saving. You should generally be conservative with your money. Develop habits of thrift. In finances as well as any other important part of our lives, whether we like it or not, we live the law of the harvest" [i.e. you reap what you sow].

"If we weren't doing those things in good times, our fear is exaggerated when we hit the bumps in the road. Modulate through all these financial times with basic, good, sound principles [such as]:

• Be conservative.
• Understand the difference between wants and needs.
• Have faith in the future.
• Avoid excessive debt, and pay off debts wherever you can.
• If you have kids in college, balance that with the value of the education.
• Always pay off high-interest-rate credit cards. Get rid of high-interest debt."

"Hang on and be as wise as you can," Marler said. "Have faith, and things will get better."

Hauula businessman describes economic impacts

[Editor's note: Mahe is a co-publisher of Kaleo, which is operated by Malaekahana Hui West, LLC. Below, he describes how the economy has recently affected his other business, Present Hawaii, which is headquartered in Hauula but has no connection with Kaleo.] 

By Moa Mahe, President, Present Hawaii

The economic downturn has had a huge impact on our company, Present Hawaii. We have had to make some changes to adjust, otherwise we would have not survived.

With the help of mainland consultants, who are experts in restructuring companies, we have made changes to get our business through these times.

In 2007 we purchased a timeshare marketing company that has 12 kiosk locations in Waikiki. When the crisis hit the mortgage industry, it affected that company to the point where we could not get the timeshare units we sold financed due to new requirements, such as higher credit scores and higher income levels required by the lending companies.

We were further impacted by the slowdown in the visitor industry, that has dropped at least 20%.

In May, 2008 we sold off our interest in the timeshare company to a local investor from Honolulu. We took a huge hit, but we had to do it to consolidate and reduce expenses.

We had also purchased several vacation home properties in Koolauloa in 2007, but as part of our cost-cutting measures we are in the process of selling those as well. Fortunately, the new buyers have allowed us to continue to manage and maintain the sites.

So, largely due to the current economy, our aggressive purchases in 2007 have not panned out. The more than 60% of our former employees who worked on timeshares in Waikiki are no longer with us with the sale of that company. Also, with the advice of our business consultants, we have restructured our remaining operations into separate entities and are focusing on our core business — the tour and travel support services we provide for our travel partners as well as groups coming to Hawai'i.

This has been a hard year, and I would personally like to thank our local communities for their support and well wishes. But the message I really want you to get from our experiences is that I am confident we will survive the downturn and intend to be in our Hauula office for a very long time.